The Consumer Financial Protection Bureau is looking to overhaul how banks and credit unions with more than $10 billion in assets determine overdraft expenses.
The proposal, announced Jan. 17, includes two ways for banks and credit unions to determine costs: One would allow financial institutions to calculate their own overdraft expenses and losses using the CFPB’s proposed standards, while the second would use benchmark fee rates set by the bureau — $3, $6, $7 or $14 — and is seeking feedback on the appropriate amount.
The CFPB also proposed banning the mandatory use of preauthorized electronic fund transfers to repay transactions paid into overdrafts by institutions that charge overdraft fees higher than a designated threshold. The bureau said it plans to evaluate the market’s response to the proposal before deciding whether to change overdraft service policies for smaller banks.
According to the CFPB, the proposal closes “an outdated loophole” exempting overdraft lending services from the Truth in Lending Act and other related consumer financing laws. Director Rohit Chopra said overdraft loans secured “special treatment” following passage of the 1968 law to cover paper checks which were at the time frequently sent through the mail. Chopra claimed banks began raising fees and using the exemption to the law to churn high volumes of overdraft loans on debit card transactions during the rise of debit cards in the 1990s and early 2000s.
Banks with more than $10 billion in assets typically charge $35 for an overdraft loan, the agency said, despite the majority of consumers’ debit card overdrafts being less than $26, and are paid back within three days. The proposal would save consumers an estimated minimum of $3.5 billion in fees annually. About 23 million households pay overdraft fees on an annual basis.
“The proposed rule would require very large financial institutions to treat overdraft loans like credit cards and other loans as well as to provide clear disclosures and other protections,” according to the CFPB. “Many banks and credit unions already provide lines of credit tied to a checking account or debit card when the consumer overdraws. The proposal provides clear rules of the road to ensure consistency and clarity.”
There was an estimated $12.6 billion in overdraft fee revenue in 2019, which has since fallen to an average of approximately $9 billion annually. In 2022, Wells Fargo and JPMorgan Chase reportedly accounted for one-third of overdraft revenue by banks with more than $1 billion in assets.
The proposal is part of the CFPB’s ongoing work to reduce overdraft fees. In early 2022, the bureau announced that it was examining overdraft fee practices at 20 banks “for further examination and review.” The CFPB undertook overdraft-related enforcement actions against Wells Fargo and Regions Bank in 2022 and Atlantic Union Bank last year, ordering them to return to customers $205 million, $141 million and $5 million, respectively. The banks were also ordered to pay substantial civil money penalties to the CFPB’s victims relief fund.
The proposal is part of a broader regulatory push against fees across numerous sectors, said Kirk Hovde, managing principal & head of investment banking at the Hovde Group. Banks will have to make up for the lost overdraft revenue in other places if the rule is implemented, he added.
Hovde said he wouldn’t be surprised if the proposal, if implemented, is passed down to community banks. If it is, Hovde called on banks to evaluate how any changes impact their overdraft policies and ensure that the revenue generated through overdrafts doesn’t evaporate.
The American Bankers Association criticized the overdraft proposal, arguing the CFPB unveiled the plan without first assessing its economic impact on community banks and credit unions as required under the Dodd-Frank Act.
ABA President and CEO Rob Nichols said the bureau lacks legal authority to subject overdraft services to the Truth in Lending Act. He argued the proposal “would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity. The CFPB is effectively proposing to take away overdraft protection from consumers who want and need it.”
Independent Community Bankers of America President and CEO Rebeca Romero Rainey said her association is “encouraged that it would exempt community banks with less than $10 billion in assets. This critical exemption recognizes that community banks offer specialized overdraft products and services that are not commoditized but customized to meet the needs of their customers and local markets.”
Romero Rainey also called on policymakers to implement tiered regulation for banks with more than $10 billion in assets and evaluate the impact overdraft restrictions have on deposit account fees for customers and businesses. “ICBA looks forward to reviewing today’s proposal and submitting comments as we continue to work with the CFPB to ensure this rulemaking does not negatively impact community banks or the local customers and communities they serve,” she added.
The proposal was also panned by House Financial Services Committee Chair Patrick McHenry (R-N.C.) and Financial Institutions and Monetary Policy Subcommittee Chair Andy Barr (R-Ky.).
“The Biden administration’s attempts to mandate one-size-fits-all consumer financial products and services diminish financial inclusion, limit consumer choice, stifle innovation and ultimately raise the cost of all consumers,” they said. “This proposed rule will further reduce access to the short-term liquidity products that millions of Americans rely on to help make ends meet. We urge the CFPB to withdraw this misguided proposal that harms the very consumers the agency was created to protect.”
The plan is supported by the Democratic National Committee. Press Secretary Sarafina Chitika called the announcement “good news for hardworking families, as President Biden is taking on the big banks to cut junk fees and lower costs for Americans across the country. While President Biden takes on corporations trying to jack up costs and rip off the middle class, (Make America Great Again) Republicans are cozying up to Wall Street and promising new tax handouts for the ultra-rich.”